HC up­holds RBI cir­cu­lar on ad­di­tional tier bonds

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CHEN­NAI: In a big blow to hold­ers of ‘ad­di­tional tier (AT1) bonds is­sued by Yes Bank, the Madras high court has up­held the le­gal va­lid­ity of the Mas­ter cir­cu­lar-Basel III Cap­i­tal Reg­u­la­tions is­sued by Re­serve Bank of In­dia (RBI) writ­ing of the AT1 bonds, which are a type of un­se­cured, per­pet­ual bonds that banks is­sue to shore up their cap­i­tal.

Dis­miss­ing the plea moved by the Bokaria broth­ers along with their Hindu Un­di­vided family in this re­gard, the first bench com­pris­ing Chief Jus­tice AP Sahi and Jus­tice Senthilku­mar Ra­mamooor­thy, said “The na­ture of A1 Tier Bonds did make an of­fer which made the pe­ti­tion­ers men­tally rich, but that was sub­ject to a fi­nan­cial ad­ven­tur­ous jour­ney that was sub­ject to risks and hazards that were at­tached with the na­ture of the trans­ac­tion it­self.”

“Their de­sire to be pos­sessed of spec­u­la­tive wealth was cir­cum­scribed and hedged by law­ful lim­i­ta­tions that were not un­known to them or to com­mer­cial trans­ac­tions of this na­ture. Any tin­ker­ing with the im­pugned cir­cu­lar on a lib­eral note may be not only against the present cause, but may have ad­verse im­pacts oth­er­wise,” the bench said.

Fur­ther on point­ing out that in the in­stant case, the pe­ti­tion­ers hav­ing ac­cepted the terms and con­di­tions of is­sue can­not turn around and say that the con­di­tions are un­rea­son­able and the Mas­ter Cir­cu­lar suf­fers from man­i­fest ar­bi­trari­ness and un­rea­son­able­ness, the bench said “This Court does not see as to how in a mat­ter of in­vest­ment, can the investor raise an is­sue of the ab­sence of au­thor­ity of law, when the bank it­self while is­su­ing the in­stru­ment of of­fer had made it clear that the power was avail­able with the RBI to write-off the cap­i­tal un­der the in­stru­ment, and the in­vest­ments were made on such con­di­tions ex­ist­ing.”

Also, on set­ting aside the pe­ti­tioner’s ar­gu­ment that the in­vest­ments are property and, there­fore, writ­ing-off the in­vest­ment will vi­o­late Ar­ti­cle 300A of the Con­sti­tu­tion (No per­son shall be deprived of his property save by au­thor­ity of law, the bench said “this is not an act of ex­pro­pri­a­tion of property so as to at­tract Ar­ti­cle 300A of the Con­sti­tu­tion of In­dia.

The Prin­ci­pal amount in­vested it­self is ca­pa­ble of los­ing its value on its own even if the Mas­ter Cir­cu­lar is not ap­plied. Thus, the chal­lenge to the Mas­ter Cir­cu­lar on con­sti­tu­tional grounds is a chal­lenge in vain.”

“The ac­tion taken by the Re­serve Bank of In­dia on the strength of the cir­cu­lar dated 1.7.2015 can­not be cru­ci­fied on any con­sti­tu­tional ground, so as to pul­ver­ize the Mas­ter Cir­cu­lar and thereby nul­li­fy­ing the im­pact of a prompt ac­tion that has been taken in larger pub­lic in­ter­est by the RBI,” the bench added.

The pe­ti­tion­ers had con­tended that the Mas­ter Cir­cu­lar is un­con­sti­tu­tional as it de­prives them of their property and does so by in­vid­i­ously dis­crim­i­nat­ing between AT 1 Bonds, which are a form of debt, and other forms of debt. They also claimed that it also vi­o­lates Ar­ti­cle 14 be­cause the AT 1 bond hold­ers are dis­crim­i­nated against by other bond/deben­ture hold­ers who are as­sured re­pay­ment of the debt un­der Sec­tion 71 of CA 2013.

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